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Consignment -- A Sales Adventure

Once upon a timeOnce upon a time, many yearsconsignment program involves a level of
ago there was a young, ambitious salesmanoverhead that may not be supportable on low
selling flat rolled steel. This energeticturnover items.- Integrity of customer. No
young man called on one potentially largematter how thorough your consignment
account for months and months with zeroagreement, all such programs involve a high
success. He was going nowhere fast. The onlylevel of trust between parties. How easy are
thing he got from the rather large, burlythey to do business with?It is very
looking professional purchasing agent wasimportant, then, to complete a diagnostic
frustration. The purchasing agent knew thereview. The diagnostic review, initiated by
young salesman was short on experience. Theyour sales support team, is the first step in
young salesman felt that the purchasing agentpreparing for consignment. The review
actually enjoyed watching him squirm monthinvolves your entire organization and
after month. This young salesman, beingrepresents a complete and thorough assessment
enthusiastic and energetic, tried every salesof the customer's current operating
technique he had ever learned. Of course, theenvironment. It provides the base of
scruffy old purchasing agent was familiarreference for all future consignment
with every one of them and had seen them manyactivities. It is primarily a data collection
times before. Nothing seemed to work on thisand operational analysis effort which defines
guy. The young man just couldn't reach him.the consignment opportunities and the
So, he went back to something very basic thatchallenges that must be met for
most of us in sales (especially we Babyimplementation. It includes an assessment
Boomers) learned from day one. The youngof:- Operations- Material Flow- Material
salesman reflected on the words spoken by hisStorage- Organization- Market RequirementsThe
most cherished mentor, "Build a relationshipdiagnostic review results in a thorough
son. Get the man to like you and he'll tellunderstanding of the barriers, constraints
you how to do business withand opportunities to implementing the
him."ExpectationsWell, the young man triedconsignment partnership. It provides the
and tried, but even that didn't seem to work.baseline for assessing improvement
He was ready to give up. He was tired ofopportunities and for developing the
repeatedly hearing that same patheticconsignment strategy. Failure to perform the
purchasing agent's theme song, "I'm happydiagnostic review significantly reduces the
with my current suppliers."The young salesmanprobability of success for consignment
was not smart enough, did not have enoughimplementation. This can often negate any
scar tissue and was not confident enough tocost savings generated by the concept
reply, "Maybe that's because you have setitself.Once an account is determined eligible
your expectations way too low." Instead heand the diagnostic review has been completed,
resorted to his secret weapon, his rarelyfurther development of the rules of
used prideful technique that only came outengagement include:- Minimum turn
when all else failed - He begged. "Mr.rate- Number of items to be
Customer, is there anything I can do,consigned- Stocking location- Who will do the
anything at all that will convince you tocount- How damaged goods will be
give me a chance to do business withhandled- What the replenishment cycle will
you?"Have you ever been in the midst of abe- What the billing procedure will be- What
sales presentation and feel a knockout punchthe billing cycle will beOther criteria that
land on your chin? Well, that's how the replyis specific to the customer in question
felt to the young salesman. "Look, we have ashould be added to this list.JIT on
partnership with our current supplier. TheSteroidsConsignment partnerships act like
only way you could ever do business with meJust-in-Time programs on steroids. They
is if you gave me our steel for free," theprovide all the benefits of Just-in-Time
purchasing  agent  barked.without the high transaction cost, purchasing
management stress and risk of stock outs.It
The young salesman was devastated; He sawis extremely important to get as much
the thrill of victory vanish before his eyes,specific information as possible directly
as he tasted the agony of final defeat. Hefrom the customer. When you do your "cost
walked away from that call with his tailsavings analysis" and your "price is not the
between  his  legs.same as cost demonstration," you will face
less of a challenge if the bulk of your
The young salesman was down and depressed.information comes from the customer, thereby
He was in one of those typical valleysincreasing their perceived accuracy of your
anybody who is or has ever been in salesassumptions.The following information is
recognizes. The best way to pull ourselvescritical to the success of your sales
out is to make a buddy call - a call on onepresentation. Your objective is to get as
of our best customers, based not on revenuemuch accurate information as possible from
but on friendship; one of those frequentthe customer. That information should
calls we make and get criticized for makinginclude:- Average volume of purchases on
because the sales volume doesn't justify theitems being considered for
number of times we visit."He was a friend,"consignment- Average inventory of purchases
the young salesman thought. So he told himon items being considered for
the story. His friend and customer wasconsignment- Average number of turns on items
sympathetic, understanding and even though hebeing considered for consignment- Average
didn't offer any advice, the young salesmancost per transaction (Customer generally
recaptured his spirit. That night as he satdoesn't know the answer to this one, but use
on his front porch reflecting on the day, hewhatever number he guesses. Industries
thought, "Why not? Why not give him ouraverage between $30 per transaction to as
product for free?" Full of excitement, thehigh as $85 per transaction.)- Annual average
next morning he went directly to his boss,inventory write-offs- Cost of cycle
the owner of the small privately heldcounting- Cost of annual physical inventory
company. He convinced the owner of theincluding reconciliation- Number of stock
integrity of his new plan.A concept wasouts  per  year  and  cost  of  a  stock out
bornThe concept of consignment in steel
distribution was born. That happened in theIf your customer can't answer these
mid 1980's. Consignment was already beingquestions, try to help them come up with
used in the fastener industry but I do nottheir best guesstimate before you resort to
recall anybody in the steel distributionusing industry estimates. The idea is that it
industry using it. But, as we, the youngis difficult for the customer to challenge a
salesman and me, his boss, found out, thenumber that they created.Consignment
concept of consignment can work in anyBenefitsConsignment benefits, pure and
industry. It was a tough sell, not so much tosimple, equate to cost reductions. These cost
the customer, but to me as his boss. But, wereductions  include:
did it and it was successful. The prospect
this young salesman almost walked away from- Reduction or redeployment of
became our largest account, purchasing overpersonnel- Reduction of transaction
$4 million by the end of the second year. Itcosts- Reduction of handling costs- Reduction
became a learning experience for both of usof insurance costs- Reduction of inventory
and we both profited from it. And the largetaxes- Vendor consolidations- Reduction of
burly looking purchasing agent actually didinterest costs- Elimination of opportunity
become one of the young salesman's closestcosts- Elimination of stockoutsA primary
friends.Consignment can become a veryobjective of consignment is to reduce the
effective marketing tool if it is usedcustomer's cost of carrying inventory. This
correctly. The emphasis is on using itincludes the cost of money, shrinkage, taxes,
correctly. A consignment partnership shouldhandling and storage. Typically, these
not be considered without establishinghandling costs range from 18-30% of the
specific criteria for selecting appropriateaverage inventory value.Additional benefits
accounts up front. This is extremelyto the customer
important to you, the supplier. We call thisinclude:- Flexibilityo Material is always in
selection criteria the "Rules ofstock at no cost until the material is
Engagement."In contrast to the normal Rulesreleased for production. Quantities available
of Engagement in selling, consignment Rulescan be altered to meet peak demands as well
of Engagement are predetermined by theas downturns.- Reduction of dollar investment
supplier, not the customer. Of course, thein inventoryo Consignment partnership
rules can be modified with proper approval toprovides an alternate use of capital and
fit different situations. However, acustomers will not be invoiced for material
consignment partnership must be a win-winuntil released for production. It also
relationship in order to be successful.Rulesprovides emergency safety stock for
of EngagementThe specific criteria that needproduction with no inventory investment
to be determined before a consignmentcost.- Shorter lead timeso Normal lead times
partnership is offered include:- What is thewould be approximately 1-2 days, however, the
minimum annual sales volume you are willingconsignment partnership eliminates lead time
to accept?- What are the minimum annual grossas material is always in stock and available
margin dollars you are willing toat the customer's plant.- Assures growth
accept?- Are financial statements availableopportunityo Consignment partnerships provide
for your review?- Is the customer financiallythe availability of consistent quality.
secure?- How much risk/investment are youQuantities and pricing are not subject to
willing to accept in off-site customerrestrictions based on changing market
inventory?Answers to these preliminaryconditions. Consignment partnerships enable
questions need to be established in additionus to effectively manage the supply chain,
to others that may pertain to your productthus ensuring the lowest total
and industry.An Assessment of the Consignmentcost.- Pricingo Pricing will be consistent
PartnershipEven today in many industries,regardless of quantity used. (No Extras) The
consignment is on the leading edge of customprice for one item is the same as the price
designed cost reduction programs. Initiativesfor 100 items.- Vendor reductiono Reducing
focus on total cost, not price, in order tothe number of vendors, consolidating sizes,
move to the next level of partnering,parts, communication and administration can
surpassing expensive JIT programs that havecontribute to overall cost reductions -
high  administrative costs and service risks.substantial reduction in debits and
credits.- Generalo The intent of this program
The major objective of a consignmentis designed to offer overall cost reductions,
partnership is to reduce costs by eliminatingflexibility in scheduling, improved cash
inventory and duplicate effort, as well asflow, reduction in inventory and investment,
reducing shrinkage and lowering transactionassured growth opportunities and to enhance
and handling costs. It is also effective inlong-term vendor relationships.This results
reducing scrap, rework, equipment downtime,in the true meaning of partnership, a win-win
lead-time and over production.As consignmentrelationship. A customer may ask the
becomes recognized in the marketplace as thequestion, "How can you provide all these
"way of the future," caution should beservices without charging a substantial
exercised due to the lack of experience andpremium on pricing?" The answer is simple.
misconceptions by theConsignment is a partnership that provides
competition.Misconceptions include:1:benefits to both parties. Your benefits as a
Consignment  is  a  Supplier  Programsupplier include:- Locking out
competition- Better control of inventory- No
Consignment does not start with a companywarehouse space required for
supplier seminar where you ask the customergrowth- Regularly involved at customer
how much he wants to stock on his floor.location- First chance at new
Consignment is complex, requiring supplieropportunities- Hard to cancel - hard to
professional expertise, state of the artduplicate- Customer becomes supplier
technological MIS and a true commitment of adependent- Free storage space at the
joint partnership throughout bothcustomer's  facility
organizations.2: Consignment is Just Another
Program/ProjectHappy Ending?We started this article in
storybook fashion. Consignment may sound like
Because consignment is a totalthe "Knight in Shining Armor," the "Magic
organizational philosophy on both theBullet," or the answer to cracking your
customer's part and the supplier's part,toughest challenge. Be cautious. Not every
implementation extends beyond the purchasingstory has a happy ending. You can hurt
department. Consignment requiresyourself with consignment. Consignment is a
organization, education and training,serious program that requires serious
especially with front line supervision andinvestment of assets and resources. Make sure
labor on the shop floor.3: Consignment isyou do your homework in the beginning.
Easy  and  Can  be  Implemented  QuicklyConsignment is not right for every account.
It should be the exception, not the rule.
Consignment is not easy although consignmentBut, if it's done right, it can be the
customers may think so. However, you can make"Knight in Shining Armor." So, if you've done
it easy because of your years of experience,your homework and all the pieces fall into
expertise and support from your ITplace, go for it. And, when that purchasing
department. Consignment requiresagent says to you that he's happy with his
organizational change and, in some cases,current suppliers, don't be afraid to look
physical plant changes. Cultural transitionhim in the eye and, without cracking a smile,
barriers can extend the process. Sustainingreply very slowly..."Maybe that's because you
the continuous improvement philosophy ofhave set your expectations way - too -
consignment is critically dependent onlow!"Dr. Eric "Rick" Johnson () is the
organizational transition.Implementation offounder of CEO Strategist LLC. an experienced
consignment requires a plan, anbased firm specializing in leadership. CEO
implementation team, a commitment from bothStrategist LLC. works in an advisory capacity
parties and staying power to build awith company executives in board
partnership seeking continuous costrepresentation, executive coaching, team
savings.How do you know if consignment iscoaching and education and training to make
right for a particular account?First,the changes necessary to create or maintain
determine which accounts may or may not becompetitive advantage. You can contact them
eligible for consignment. At a minimum, youby calling 352-750-0868, or visit for more
should consider the following:- Financialinformation.Rick received an MBA from Keller
stability. Since consignment involves theGraduate School in Chicago, Illinois and a
physical transfer of inventory to yourBachelor's degree in Operations Management
customer's location before he has paid, youfrom Capital University, Columbus Ohio. Rick
should be sure that he will remain solventrecently completed his dissertation on
throughout the program. Financial reports areStrategic Leadership and received his Ph.D.
the preferred method of validatingHe's also a published book author with four
stability.- Minimum level of revenue desired.titles to his credit: "The Toolkit for
This needs to be determined to justify theImproved Business Performance in Wholesale
investment not only of inventory, but ofDistribution," the NWFA & NAFCD "Roadmap",
other resources to manage theLone Wolf-Lead Wolf-The Evolution of Sales"
program.- Minimum volume level on items. Theand a fiction novel, "Shattered Innocence.



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